4/30/2013 @ 4:17PM8,081 views

Overstock Is Amazon Without Nosebleed Multiples

If you like the online discount retailers that sell just about everything, but don’t like the price, multiple or slowing growth of a stock like Amazon (AMZN), then Overstock.comOverstock.com (OSTK) with a Zacks Rank of 1 and four earnings beats in a row might be worth a look.

Like Amazon, Overstock sells a plethora of products from electronics and jewelry to furniture and handmade items from global artisans–even cars. While they don’t sell music or have an app store or tablet like some of their competitors, their pricing, product selection and customer service are top notch and the company has been delivering solid earnings growth.

Earning Checkup One of the great things about this time of year is that we get the ability to take a detailed peak into how companies are functioning and performing. It’s like having your car recently inspected by a savvy mechanic, giving you a little more piece of mind as you drive.

On April 18, Overstock.com reported Q1 results that beat the Zacks Consensus Estimates by a whopping 138.5%. TotalTotal net revenue for Q1 2013 and 2012 was $312.0 million and $262.4 million, respectively, a 19% increase. They attributed the growth in net revenue primarily to a 21% increase in average order size, partially offset by a small decrease in the number of customer orders.

On the gross profit side, they saw a 24% year over year increase to $58.9 million, representing 18.9% and 18.1% of total net revenue for those respective periods. The increase in gross profit was primarily due to higher revenue and a shift in product sales mix into higher margin home and garden products, and lower warehousing costs, profits were partially offset by higher freight costs.

Gross margins also increased 80 basis points to 18.9% from the same quarter in 2012.

I also liked that free cash flow was on the rise, it totaled$32.3 million and$3.5 million for the twelve months ended March 31, 2013and 2012, respectively. The$28.8 million increase was due to a$36.1 million increase in operating cash flow, partially offset by a$7.2 million increase in capital expenditures.

It was a fantastic quarter that was applauded by investors, who took the share price from $11.00 just ahead of the report, to its current level of $20.70, a nearly 90% jump in price. Overstock obviously passed this checkup with flying colors.

Are Shares Worth the Price? When you look at some of Overstock’s peers, the 22.8 forward P/E multiple seems rather cheap. Overstock, like Amazon, allows buyers to find the best prices from multiple suppliers and gives consumers very low relative prices on many of their products.

A recent Nielsen State of the Media Consumer Usage Report placed Overstock.com among the top five most visited mass merchandiser websites. The NRF Foundation/American ExpressAmerican Express Customer Choice Awards ranks Overstock.com #4 in customer service among all U.S. retailers which helps when your prices are at parity with your competitors.

Their Club O program is similar to Amazon Prime, but way more attractive and highly used among their customer base. It offers free shipping, rewards and discounts on select products.

Overstock doesn’t have the infrastructure or overhead that Amazon (AMZN)does per se, which can be viewed as good and bad. Frankly, I think its better that they are more technology focused as opposed to being a mass distributor and having the huge overhead like Amazon does.

With their 2011 O.co URL acquisition, the company is beginning to push its international and mobile expansion and adjust their image as an “overstock only” company. They have gone from being an online liquidator to a diverse retailer with a multitude of channels in which to sell product.

Their industry is ranked 30 out of 265 and is rated as a strong buy here at Zacks and an average buy among other analysts.

I like to think of it as buying Amazon a couple years back while they were in their strongest growth phase and for a fraction of the 190 times P/E multiple that Amazon is trading at now.

The Charts The charts are the tricky part here because shares have recently undergone a major rally. A signal of strength is that there has been a 5 day follow-through after the initial 60% pop in the stock, even through the turbulent market days last week.

Shares are overbought at this point in time, but I wouldn’t expect too much of a correction (relative to what we just saw). Look for strong support around the $17.25 level, which is the bottom of the gap and the pre-earnings high for the shares.

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